HM Revenue & Customs. Management of Tax Debt

HM Reveue & Customs Maagemet of Tax Debt REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 1152 Sessio 2007-2008 20 November 2008

The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Tim Burr, is a Officer of the House of Commos. He is the head of the Natioal Audit Office which employs some 850 staff. He ad the Natioal Audit Office are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year: at least 9 for every 1 spet ruig the Office.

HM Reveue & Customs Maagemet of Tax Debt LONDON: The Statioery Office 14.35 Ordered by the House of Commos to be prited o 17 November 2008 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 1152 Sessio 2007-2008 20 November 2008

This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Tim Burr Comptroller ad Auditor Geeral Natioal Audit Office 14 November 2008 The Natioal Audit Office study team cosisted of: Lee-Ae Murray, Emma Taylor Heather Thompso, Be Gatherer, Chris Hederso ad Vicky Gilso, uder the directio of Jae Wheeler This report ca be foud o the Natioal Audit Office web site at www.ao.org.uk For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office 157-197 Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: 020 7798 7400 Email: equiries@ao.gsi.gov.uk Natioal Audit Office 2008

cotets summary 4 Part ONE Overall performace i maagig debt 8 Part TWO Maagig ad prioritisig debt 14 Part THREE The costs ad effectiveess of debt 17 collectio methods Part four Prevetig debt arisig 22 Appedices 1 Progress agaist previous Committee 27 of Public Accouts Recommedatios 2 Scope ad Methodology 30 Photograph courtesy of Alamy.com

SuMMARy 1 HM Reveue & Customs (the Departmet) collected aroud 450 billio i tax ad Natioal Isurace cotributios from some 35 millio taxpayers i 2007-08. Although most tax paymets are made o time, aroud oe third are ot. The level of debt fluctuates o a daily basis. The total level of debt i the Departmet s Accouts at the ed of 2007-08 was 25 billio. The level of debt recorded o the Departmet s debt maagemet systems i March 2008 was 21.5 billio. The differece is maily because these systems exclude some debt that is due but is paid almost immediately ad there are timig differeces i whe debt is dowloaded from the mai tax systems. I this report we aalyse treds i debt levels usig figures from the debt maagemet systems. 2 Of the 21.5 billio, 17.3 billio was outstadig tax, iterest ad pealties (3.8 per cet of total tax receipts) ad the remaider was overpaymets of beefits ad tax credits. 16.2 billio was maaged by the Departmet s Debt Maagemet ad Bakig Directorate which spet 204 millio ad employed over 6,200 staff o debt maagemet activities i 2007-08 to collect 63 billio of debt. The remaiig 5.3 billio was debt maaged by other busiess areas i the Departmet. 4 MANAGEMENT OF TAX DEBT

summary 3 This report examies: The Departmet s performace i maagig debt (Part 1) How the Departmet maages ad prioritises debts (Part 2) The Departmet s methods for collectig debt (Part 3) How it ecourages taxpayers to pay o time (Part 4) 4 The report examies the Departmet s progress i respose to previous NAO ad Committee of Public Accouts reports o the former Ilad Reveue ad HM Customs & Excise. Appedix 1 summarises progress i implemetig recommedatios. This report covers tax debt owed by busiesses, employers ad idividuals across all taxes. It does ot cover tax credits ad beefits. The C&AG s Report o the Departmet s accouts examies its performace i maagig tax credits. Our methodology is at Appedix 2. Coclusios 5 The Departmet has improved its maagemet of tax debt sice our previous reports, so that tax debt as a proportio of et tax receipts is ow lower o most taxes ad the age of direct tax debt has reduced. The Departmet has ot reduced the total level of debt as it aimed to do ad, over the last year, debt as a proportio of et receipts ad the age of debt has icreased o some taxes. The umber of debts has also icreased over the last year by 22 per cet, from 13 millio to 15.8 millio. While the icreases reflect how debts are recorded ad a overall icrease i the umber of taxpayers ad other treds i cosumer debt, they also reflect a chage i the Departmet s priorities to focus more o higher value debts as it seeks to maage with fewer resources. The Departmet has trialled various iitiatives to help maage the icreasig workload, icludig chages to local debt recovery which are i trai but have yet to take effect. A more effective pealty regime could help prevet debt arisig. The Departmet is curretly cosultig o proposed chages. 6 I 2007-08, the Departmet s Debt Maagemet directorate collected aroud 310 of debt for every 1 spet, a icrease of 10 per cet from 2006-07. The Departmet has limited iformatio o the relative cost-effectiveess of its activities. The Departmet could improve the cost-effectiveess of its collectio operatios by usig the Telephoe Cetre to collect VAT debt which is maaged through separate systems. Automatically likig together debts owed by idividual taxpayers o differet taxes so they are pursued as a sigle debt would require ivestmet but could save costs i the log ru ad help the Departmet pursue smaller debts which it does ot prioritise at preset. 7 The Departmet s debt:et receipts ratio is at the lower ed of the rage for other tax authorities we cotacted, while debt it writes off as a percetage of total debt was similar or higher. The measures the Departmet uses to moitor its performace iclude some, but ot all of the performace idicators used by other orgaisatios. Its debt maagemet approach does ot yet iclude some features that the Committee of Public Accouts ad we recommeded i 2004 ad which have helped other orgaisatios improve debt maagemet. Such features iclude risk profilig ad customer segmetatio, maagig debt through a sigle IT system, iovative methods for commuicatig with customers ad a more efficiet telephoe cetre operatio. These methods would require fudig to implemet, but could reduce collectio costs ad help the Departmet better maage the growig level of debt as it competes with other orgaisatios i a more difficult ecoomic eviromet. The Departmet has udertake some developmetal work ad cotiues to review the case for deployig additioal resources i these areas but does ot have firm plas for implemetatio as other Departmetal chage programmes have take higher priority withi the resources available. Maagemet of Tax Debt 5

summary Recommedatios 8 The Departmet has developmetal work uderway i a umber of areas to improve maagemet of debt, for example developig a risk-based approach to prioritisig debts, measurig the cost-effectiveess of collectio activities, usig staff more flexibly ad itroducig commuicatio by voicemail ad text. This work takes forward previous recommedatios. The fudig available for debt maagemet projects has restricted the scale ad pace of chages achieved ad plaed. I this cotext we have divided our recommedatios betwee those that ca be implemeted relatively easily ad at low cost ad those that would require greater resources but could brig sigificat beefits i the loger term. Recommedatios that ca be implemeted at lower cost a The Departmet measures the average time take overall to collect debts but ot the percetage of debt by value collected withi 30 or 90 days as other orgaisatios are seekig to do. The Departmet should measure how much debt is collected withi these timeframes to help focus o reducig the legth of time it takes to collect debt (paragraph 1.4 1.5). b The Departmet does ot curretly kow how much tax it collects i each debt recovery activity ad so caot reliably measure the cost-effectiveess of differet approaches. The Departmet should measure the cost-effectiveess of differet collectio activities so that it ca maage its resources effectively ad idetify opportuities to improve its processes (paragraph 3.3). c The Departmet has improved leaflets ad website iformatio to help taxpayers uderstad their paymet obligatios but some iformatio is limited or ot available. The Departmet should provide clearer iformatio o its website ad i prited guidace o how to fid details of paymet helplies ad iterest charges, ad the obligatio o taxpayers to submit a tax retur if they are set oe, eve if they have o tax to pay. It should also provide clearer iformatio o how a idividual s tax has bee calculated (Figure 10, paragraph 4.4). Recommedatios requirig greater resources d The Departmet geerally prioritises pursuit of debt accordig to value rather tha the likely risks of o-collectio. The umber of debts the Departmet has to maage is icreasig so smaller debts are agig ad will become more difficult ad expesive to collect. The Departmet should use iformatio it holds o customer behaviour, with iformatio from exteral sources, to build up risk profiles for each customer to prioritise ad tailor debt collectio actio ad egotiate paymet arragemets. I the iterim, the Departmet should look to prevet the build up of smaller debts ad achieve more equitable treatmet of taxpayers, thereby reducig the risk that compliace levels could fall if the public perceives that the Departmet is ot actively pursuig certai debts (paragraphs 2.3 2.5, 2.11 2.15). e The Departmet maages direct ad idirect tax debts o separate IT systems. It caot automatically lik the debts a taxpayer has o differet taxes ad pursue all debts at the same time ad it has difficulty comparig performace across taxes. Nor ca it curretly use the automated Telephoe Cetre for collectig VAT debts although a pilot to explore this is plaed for late 2008. The Departmet had a pla to itroduce a sigle IT system but had to defer implemetatio because of other fudig priorities. The Departmet should aim to itroduce a system that allows it to pursue debts more efficietly, to maage debts by customer so that debts o differet taxes are liked ad to compare performace across taxes. These chages could either be made progressively or through oe ew system (paragraphs 2.6 2.8). f The Telephoe Cetre operatig system does ot allow automated switchig betwee iboud ad outboud calls ad so caot automatically respod to chagig volumes of iboud calls throughout the day. To address this, the Departmet has cosidered various optios for maagig iboud ad outboud calls differetly but its plas are ot yet firm. The Departmet should look to itroduce ew techology to allow greater flexibility i maagig workload, icrease debt collected ad eable staff savigs (paragraph 3.10). 6 Maagemet of Tax Debt

summary g Although the Departmet s Telephoe Cetre is ope betwee 8am ad 8pm Moday to Friday ad for some hours at the weeked, staff work maily betwee 9am ad 5pm ad weeked workig is limited. Local recovery officers make most visits durig office hours. The Departmet s research ad evidece from other orgaisatios idicates that the Departmet could collect debt more quickly by extedig Telephoe Cetre opeig hours ad visitig more debtors outside office hours to improve cotact rates. Although some dowtime is ecessary to update IT systems with ew debt iformatio, the Departmet should look to expad debt collectio work i the eveigs ad weekeds ad examie the associated costs ad cotractual issues ivolved (paragraphs 3.10 ad 3.12 3.16). h Overseas tax admiistratios we visited have successfully used differet eforcemet powers ad methods for recoverig debt. The Departmet should explore the beefits ad risks of obtaiig a power to recover tax debts from taxpayers salaries or bak accouts without a court order, ad usig private debt collectio agecies to recover some types of debts. Chages i powers would require chages i legislatio to itroduce (paragraphs 3.20 3.25). i The Departmet curretly writes to customers to remid them that paymet is due although it is pilotig alterative commuicatio methods. It should itroduce ew methods of commuicatig with customers such as text, email or automated telephoe messagig i lie with good practice by other orgaisatios to reduce the amout of debt arisig (paragraph 4.5). j I respose to previous recommedatios, the Departmet has itroduced further paymet optios, icludig paymet by credit card ad direct debit for payig i istalmets. However, techology ad practices of other orgaisatios cotiue to advace. The Departmet should explore the costs ad beefits of icreasig the rage of paymet optios such as itroducig autopaymet by telephoe with the aim of makig payig tax quicker ad more coveiet for differet customer groups (paragraphs 4.8 4.9). Maagemet of Tax Debt 7

Part Oe Overall performace i maagig debt This part examies good practice i measurig performace i maagig debt ad the Departmet s performace i maagig the level ad age of debt. 1.1 I 2007-08 the Departmet collected 451 billio i tax ad Natioal Isurace cotributios from some 35 millio taxpayers ragig from idividuals to large multi-atioal corporatios. 1 Most idividual taxpayers pay Icome Tax through PAYE ad ay uderpaymets are collected by adjustig their PAYE code. Most debts occur whe paymets of self-assessed Icome Tax, Natioal Isurace cotributios, Corporatio Tax, VAT or employers PAYE are ot made o time. I 2007-08, aroud 30 per cet of taxpayers with a tax liability did ot pay o time although ofte paymets are made soo after they are due ad therefore do ot require ay actio. Our research estimated that i April 2008 betwee 830,000 ad 1.5 millio (2.2 to 4 per cet) of workig age adults, icludig those who pay their Icome Tax through PAYE, had a persoal or busiess tax debt with the Departmet. 2 1.2 We last reported o debt maagemet by the Ilad Reveue i 2004 ad by HM Customs & Excise 3 i 2005. Followig the creatio of HM Reveue & Customs i 2005, a ew Debt Maagemet ad Bakig directorate was set up. I 2007-08 it spet 204 millio ad employed over 6,200 full time equivalet staff o debt maagemet activities to collect 63 billio of debt. As part of the Departmet s drive for efficiecy savigs the Directorate has reduced its staff umbers by 14 per cet sice 2006. The Directorate has also bee implemetig a chage project as part of the Departmet s wider Trasformatio Programme. 4 It plas to sped 29 millio up to 2011 to facilitate flexible methods of paymet ad streamlie processes. It expects to achieve staff savigs of 217 millio by 2011. The Departmet has made some progress i implemetig the Committee of Public Accouts previous recommedatios icludig usig more iformatio to trace debtors, improvig iformatio for those i debt ad itroducig paymet by credit card ad direct debit. O others, it has developmetal work uderway icludig prioritisig debts accordig to risk, pursuig more debts through the Telephoe Cetre ad measurig the debt collected withi 30 or 90 days. It is also cosultig o possible chages i legislatio such as seekig additioal powers for eforcig debts ad chagig the pealties it ca impose for late paymet. Full details of the Departmet s progress agaist previous recommedatios are at Appedix 1. The process for collectig ad recoverig debts 1.3 The Departmet has a stadard debt collectio process (Figure 1) supported by a IT system which automatically routes all direct tax debts through the process. The IT system does ot deal with idirect taxes. For most taxes, the Departmet seds out iitial postal remiders requestig paymet oce it becomes due. Debts which are ot paid are referred to the Departmet s Telephoe Cetre which attempts to cotact debtors to obtai paymet, ad the trasfers uresolved debts to local Debt Pursuit Offices. Some debts are trasferred directly to Debt Pursuit Offices. Where a address is icorrect, the Departmet s Tracig Uit traces up-to date cotact details ad missig telephoe umbers are traced by a exteral provider. We cover the operatio of Departmet s collectio activities i Part 3. 1 HM Reveue & Customs 2007-08 receipts, reported by the Departmet as Natioal Statistics. This figure differs from the receipts figure reported i HM Reveue & Customs Accouts for 2007-08 ( 457 billio) which is reported o a accruals basis. 2 Ipsos MORI Omibus Survey, April 2008 face-to-face survey of 1409 adults, weighted to be atioally represetative of the UK workig age populatio. 3 The recovery of Debt by the Ilad Reveue, HC 363, 2003-04; Comptroller ad Auditor Geeral s Stadard report o the Accouts of HM Customs & Excise 2004-05, HC 447, 2004-05. 4 The Comptroller ad Auditor Geeral examied the programme i HM Reveue & Custom s Trasformatio Programme, HC 930 2007-08. 8 Maagemet of Tax Debt

part oe Measurig performace i maagig debt 1.4 Our previous report recommeded improvemets i the Departmet s maagemet iformatio to achieve better performace. The Committee of Public Accouts recommeded that the Departmet should seek to achieve similar clearace rates to the utilities sector, which cleared 90 per cet of debt withi 90 days, to prevet the build-up of older debt ad associated write-offs ad moitor the percetage of debt collected withi 30 ad 90 days i lie with good practice. 1.5 The Departmet is lookig to develop a measure of how much debt, by value, it collects withi 30 days. It does measure the average time take to collect all debt (17.5 days), icludig those debts which are collected quickly followig remider letters. Debts that require itervetio by the Debt Maagemet ad Bakig directorate take loger to collect (72.2 days). 1.6 Debt collectio operatios i fiacial services ad utilities curretly use busiess-wide ad idividual customer data ad various idicators to moitor performace (Figure 2 overleaf). The Departmet measures performace agaist some but ot all of these idicators. 1 The Departmet s approach to collectig debt ad the value of debt at each stage i March 2008 Paymets become overdue Debt maaged by other offices outside the Debt Maagemet directorate ( 3.3 billio) Outstadig Icome Tax, Corporatio Tax ad PAYE debts are dowloaded ito Itegrated Debt Maagemet System ad VAT debts are separately dowloaded ito the Departmetal Trader Register to geerate lists of items for actio Debt Maagemet ad Bakig automatically issues remiders ( 3.2 b) (This figure also icludes auto-remiders issued by tax busiess areas) Self assessed Icome Tax, PAYE, tax credit overpaymets ad some other debts are passed to the Telephoe Cetre where operators cotact the taxpayer to seek paymet 2.3 billio of debt Cases ot settled by the Telephoe Cetre are passed to the Debt Pursuit Offices for eforcemet actio Whe remiders o VAT ad Corporatio Tax cases are usuccessful, the case is trasferred directly to Debt Pursuit Offices 6.3 billio of debt Ucollectible debt is writte-off Debts with ukow addresses passed to the Tracig Uit Whe eforcemet actio is usuccessful, cases are passed to the Eforcemet ad Isolvecy Service for bakruptcy or widig up procedures 2.3 billio of debt Debts with ukow telephoe umbers passed to exteral tracig service provider Court proceedigs Source: Natioal Audit Office NOTE Figures exclude suspeded debt ( 0.4 billio maaged by the Debt Maagemet ad Bakig Directorate ad 2.0 billio maaged by other offices) ad debt i specialist collectio offices, such as the Couty Court Uit ad New Busiess Uit ( 1.7b). Figures iclude tax credit debt. Maagemet of Tax Debt 9

part oe 1.7 We have used the data curretly held by the Departmet to measure curret performace ad treds over time i the total levels of tax debt ad o differet taxes, levels of debt writte off ad the age profile of debt. Where possible we make comparisos with other orgaisatios. We look at costs of collectio i Part 3. Levels of debt 1.8 The debt balace fluctuates o a daily basis as debts are paid ad ew debts arise. We have aalysed treds i debt levels i recet years by comparig the level of debt recorded i the Departmet s Debt Aalysis Matrix i March with the aual et receipts for each tax. We used the Debt Aalysis Matrix because it is the maagemet iformatio system used by the Departmet to operatioally maage ad regularly report to seior maagemet o its debt levels. The figures i the Matrix i March 2008 were 3.5 billio lower tha the figures reported i the Departmet s 2007-08 Accouts as at 31 March 2008. The mai reasos are that the Matrix excludes some debts which were due but which were paid almost immediately ad that there are timig differeces i whe the debt is dowloaded to the Matrix from the mai tax systems. The majority of the differece related to VAT debt ( 2.5 billio) which was due but which had ot yet dowloaded oto the debt maagemet system. 2 Key Performace Idicators used by the Departmet ad other orgaisatios KPIs used by a rage of other orgaisatios What the Departmet measures Collectio performace Debtor days = debt balace/receipts x 365 or Debtor days = debt balace/debt raised x 365. Measures the umber of days worth of debt outstadig. Aged debt profile the older the debt, the slower debt is beig collected. Collectio efficiecy: debt collected/full time equivalet staff. The Departmet measures debtor days usig both methods. The Departmet ca measure tax debt that is more tha 3 moths, 6 moths ad 1 year old ad for direct taxes, debts more tha 2 years ad more tha 4 years old. The Departmet measures debt collected/full time equivalet staff. Cost performace Yield-cost ratio by collectio activity to moitor the cost effectiveess of differet collectio actios e.g. telephoe cetre. Average cost of collectio per debtor measure of the cost effectiveess of the collectio process. The Departmet measures the amout of debt collected per 1 spet. It measures cost of collectio per debt collected by activity ad has work uderway to measure the amout of debt collected per 1 spet by collectio activity. Not measured by the Departmet. Compliace performace Deliquecy ratio: umber of deliquet debtors/umber of active debtors. Proportio of debtors who have missed several paymets. Bad debt loss ratio: ucollectible debt/total debt to moitor the proportio of ucollectible debt ad possible future write-offs. 1 Not measured by the Departmet. The Departmet measures the amout of debt it writes off. 1 Source: Natioal Audit Office NOTE 1 Write-offs are debts that are cosidered to be irrecoverable because i practice the Departmet caot collect them. It also measures remissios which are debts capable of recovery but the Departmet has decided ot to pursue the liability, for example, o the grouds of value for moey or official error. 10 Maagemet of Tax Debt

part oe 1.9 I March 2008, the tax debt balace was 17.3 billio o the Matrix ad comprised outstadig tax, iterest ad pealties for late filig ad icorrect tax returs. I additio to tax debt, the Departmet was owed 4.2 billio arisig from overpaymets of tax credits. We have ot covered tax credit debt i this report ad have excluded tax credit debt from the data where possible. We examie maagemet of tax credits separately i the C&AG s Report o HMRC s Accouts each year. The Debt Maagemet ad Bakig directorate set a target to reduce total debt outstadig by 20 per cet from 20.4 billio i 2006 to 16.6 billio by March 2008. I practice the amout icreased to 21.5 billio at March 2008, maily because tax credit debt icreased by 57 per cet over the period ad Corporatio Tax debt by 37 per cet. Of the 21.5 billio, 16.2 billio was maaged by the Debt Maagemet ad Bakig Directorate ad the remaiig 5.3 billio was maaged by other busiess areas i the Departmet. 1.10 The mai areas of debt are PAYE (32 per cet of total tax debt o average durig 2007-08), VAT (27 per cet) ad self-assessed Icome Tax (21 per cet) (Figure 3). The level of debt fluctuates throughout the year from 15.6 billio to 18.3 billio, risig after the differet deadlies for payig each tax. For example, self-assessed Icome Tax debt rises after paymet deadlies at 31 Jauary ad 31 July ad a peak i PAYE debt follows the ed-of-year deadlie i May. 1.11 The debt figures exclude stoodover tax, estimated at aroud 15 billio, which comprises direct tax assessmets (for example o Corporatio Tax ad self assessed Icome Tax) which are ot payable while uder appeal. The Departmet caot legally collect stoodover tax ad so does ot classify it as debt. The Departmet icludes suspeded tax i its debt figures. Estimated at aroud 2.4 billio, it arises whe assessmets of idirect taxes (for example VAT) are ot yet cofirmed. It icludes upaid tax of 1 billio relatig to Missig Trader fraud ivestigatios. Missig Trader fraud is a type of VAT fraud, which i its simplest form ivolves a busiess obtaiig a VAT registratio umber i the UK for the purposes of purchasig goods free from VAT i aother EU member state. The busiess sells the goods at a VAT iclusive purchase price i the UK ad the goes missig or defaults without payig the output tax due to the Departmet. 5 The amouts are legally collectible ad classed as debts, but because of their ature they may ot be recovered so we have excluded or show these amouts separately i some areas of our aalysis. 1.12 The level of tax debt as a proportio of et tax receipts icreased from 3.8 per cet i 2004-05 to 4.3 per cet i 2005-06 ad fell to 3.8 per cet i 2007 08 (Figure 4 overleaf). The percetage level of Icome Tax-related debt (which icludes self assessed Icome Tax, PAYE, Natioal Isurace cotributios ad Capital Gais Tax) is lower tha i 2002-03 whe we reported previously. This debt rose sharply i 2005-06, largely because of PAYE debt, ad the fell agai as the Departmet prioritised this area. Corporatio Tax debt is also lower tha whe we previously reported. It fell to 4 per cet i 2005-06. Sice the it has icreased as the umbers of icorporated busiesses ad so Corporatio Tax debts icreased. VAT debt as a proportio of VAT receipts has rise to 5.1 per cet, partly because of Missig Trader debt which is suspeded whilst uder ivestigatio. Excludig suspeded debt, the icrease is from 1.3 per cet i 2004-05 to 2.5 per cet i 2007-08. 3 Corporatio Tax 10% Self-assessed Icome tax 21% Proportio of debt by tax average for 2007-08 Other taxes 10% VAT 27% PAYE 32% Source: Natioal Audit Office aalysis of HM Reveue & Customs tax data 5 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of HM Reveue & Customs 2006-07, HC 626, 2006-07. Maagemet of Tax Debt 11

part oe 1.13 The Departmet writes off debt which i practice it is uable to collect, maily where taxpayers have become isolvet ad so further pursuit is preveted by statute. I 2007-08, the Departmet wrote off 5.6 billio i tax debt, 1.2 per cet of et tax receipts (Figure 5), compared to 3.1 billio or 0.7 per cet of et receipts i 2005 06. Most of the debt writte off i 2007-08 was VAT ( 3.6 billio), much of which was associated with Missig Trader fraud. 1.14 I other coutries we visited, tax debt as a percetage of et receipts raged from 2.7 to 12 per cet (Figure 6). The Departmet s tax debt as a percetage of receipts is at the lower ed of this rage (3.4 per cet to 4 per cet throughout the year). Overall, the Departmet s level of debt writte off as a percetage of total debt was similar to or higher tha i the coutries we visited. Age of debt 1.15 Commercial orgaisatios fid that, i a competitive eviromet, it is importat to collect debt as quickly as possible sice older debt is more difficult ad more expesive to collect. Sice 2007, geeral ecoomic chages i the UK have led to fluctuatios i iterest rates ad a reductio i available credit. Leders are icreasigly focussed o collectig debts withi the first 90 days followig chages to the bakig rules o providig for debt. 6 Much of the debt the Departmet pursues, for example paymets of self-assessed Icome Tax ad Corporatio Tax are due some time after the profits/icome to which they relate. 4 Tax debt as a percetage of et tax receipts Percetage 7 6 5 4 3 2 1 0 Icome Tax Corporatio Tax VAT VAT excludig suspeded VAT Total Positio previously reported by Natioal Audit Office 10.6% 2002-03 8.4% 2002-03 3.4% 2001-02 2% 2001-02 2004-05 2005-06 2006-07 2007-08 Source: Natioal Audit Office aalysis of HM Reveue & Customs tax data NOTES Comparable tax debt figures from the Departmet s Debt Aalysis Matrix report are available from 2004-05 owards oly. Icome Tax figures iclude self-assessed Icome Tax, PAYE, Natioal Isurace cotributios ad Capital Gais Tax. For referece, Figure 4 also shows debt figures previously reported by the NAO i the Stadard Report o the Accouts of HM Customs & Excise, HC 447, 2004-05 (2001-02 VAT figures) ad The Recovery of Debt by the Ilad Reveue, HC 363, 2003-04 (2002-03 Icome Tax ad Corporatio Tax figures). These figures were produced usig Maagemet Iformatio systems i operatio before the merger of the two departmets, ad therefore are ot directly comparable. Net receipt figures are HMRC s aual receipts reported by the Departmet as Natioal Statistics. For 2001-02 ad 2002-03 et receipt figures are from HM Customs & Excise ad Ilad Reveue Trust Statemet Accouts for 2001-02 ad 2002-03 respectively. 6 The Basel II Accord created iteratioal stadards i bakig laws ad regulatios which are used by bakig regulators to determie how much capital baks eed to put aside to guard agaist fiacial ad operatioal risks. As part of the Accord, debts older tha 90 days attract a higher risk ratig ad therefore require more capital to be put aside. 12 Maagemet of Tax Debt

part oe 1.16 Nearly a third ( 4.5 billio) of the Departmet s tax debt (excludig suspeded VAT) is greater tha oe year old. Sice we last reported o the Ilad Reveue the age profile of direct tax debt has improved. 26 per cet of debt was more tha oe year old i March 2008 compared to 37 per cet i March 2003. The biggest reductio was i PAYE debt over oe year old, from 43 per cet to 18 per cet, as the Departmet prioritised this type of debt. The amout of self-assessed Icome Tax debt greater tha oe year old icreased from 38 per cet to 41 per cet. VAT debt over oe year old has rise sice late 2007 as more Missig Trader debts become collectible followig ivestigatio. 1.17 At March 2008, ie per cet ( 1.1 billio) of direct tax debt was betwee two ad four years old, ad a further six per cet ( 784 millio) was over four years old. Most debt over two years old was self-assessed Icome Tax debt. Levels of older Corporatio Tax ad PAYE debt have remaied steady or reduced slightly sice April 2006. At August 2008, 18 per cet ( 777 millio) of VAT debt was more tha two years old, of which 36 per cet ( 279 millio) was suspeded debt. 5 Writte off debt as a percetage of et tax receipts Percetage 5 4 3 2 1 0 Icome Tax Value Added Tax Corporatio Tax Total 2005-06 2006-07 2007-08 Source: Natioal Audit Office aalysis of HM Reveue & Customs tax data 6 Total debt as a percetage of et receipts Overseas tax admiistratio Receipts (2007) (billios) Total debt (2007) (billios) Debt as a percetage of receipts (%) Caada ($CA) 198 20 10 Netherlads ( ) 201 11.3 5.6 Republic of Irelad ( ) 48 1.28 2.7 Uited Kigdom ( ) 451 17.3 3.8 USA ($) 2,400 290 12 Source: Natioal Audit Office aalysis of data provided by overseas tax admiistratios NOTE These figures give a idicatio of the rage of debt as a percetage of et receipts. It is difficult to directly compare each tax admiistratio because of differeces i the types of tax ad the way i which tax is collected, differet regulatios ad powers, for example o eforcemet ad write-offs ad levels of tax debt will vary throughout the year. Maagemet of Tax Debt 13

Part two Maagig ad prioritisig debt This part examies the Departmet s projects such as likig debts across taxes ad risk profilig to better maage ad prioritise icreasig volumes of debt. Number of debts 2.1 The total umber of tax debts has rise by 22 per cet from 13.0 millio i March 2007 to 15.8 millio i March 2008. The umber of PAYE debts has more tha doubled, partly because the Departmet is ow recordig o its IT system some debts that were ot previously recorded ad because it is trasferrig some PAYE pealties for late filig oto the system more quickly tha it did previously. I 2006, the Govermet itroduced a ew Corporatio Tax bad which led to a icrease i Corporatio Tax liabilities ad cosequetly, Corporatio Tax debts have rise by over 50 per cet. The umber of VAT debts has rise by 37 per cet ad self assessed Icome Tax debts have rise by six per cet. I particular, the umber of lower value debts has icreased. For example, a exercise by the Departmet showed that betwee April 2006 ad September 2007 debts betwee 500 ad 999 icreased by 40 per cet ad debts betwee 1,000 ad 4,999 icreased by 25 per cet. 2.2 There are a umber of possible reasos for the icrease i umbers of tax debts. It ca be oly partly explaied by a icrease i the tax base. Betwee 2006 07 ad 2007-08 the umber of Icome Tax taxpayers icreased by oe per cet ad registered traders by four per cet. More widely, cosumer debt has doubled over the last seve years. Some debtor groups may have become more kowledgeable about recovery processes. Coicidig with the rise i its workload, the Departmet s debt maagemet staff has reduced by 14 per cet sice April 2006, as part of the Departmet s overall staff reductios to reduce headcout by 12,500 by 2008. The Departmet s prioritisatio of higher value debts sice August 2007 (see below) is also likely to have cotributed to the rise i umbers of debts. How the Departmet prioritises collectio of debt 2.3 The debts the Departmet maages rage widely i value. Figure 7 shows that higher value debts represet a low percetage of the umber of debts but a high proportio of the value. The Departmet prioritises higher value debts, ad the PAYE debt, to maage its workload. 7 The umber of direct tax debts1 i each value category at 31 March 2008 Amout ( ) 0-499 500-999 1,000-4,999 5,000-19,999 20,000-99,999 100,000+ Percetage of debts 70 16 11 2 0.39 0.06 i each category Percetage of debts by value 9 11 24 18 15 23 i each category Source: Natioal Audit Office aalysis of HMRC data NOTE 1 Data icludes PAYE, Corporatio Tax ad self-assessed Icome Tax debts. The Departmet does ot have the percetage of debts by value for VAT. 14 Maagemet of Tax Debt

part two The Departmet has prioritised debts by value sice August 2007 to help it maage icreasig debt with fewer resources, ad help maitai cashflow to the Exchequer. Previously, the Departmet prioritised highest value ad most recet debt. Automated remider letters are issued for all debts, irrespective of value. 2.4 Prioritisig collectio of debt by value maximises tax collected i the short term. Other orgaisatios such as the Caadia tax authority also prioritise debts by value but combie it with other methods of prioritisatio, icludig age, risk of default ad customer type. 2.5 I focusig o higher value debts, there is a risk that actio take agaist some taxpayers will be limited to automated remider letters ad that if taxpayers are ot treated equitably, compliace i payig o time will fall if the public perceive that the Departmet pursues some debts more rigorously tha others. The experiece of the Departmet, ad other orgaisatios that collect debt, suggests that older debts are harder ad more expesive to collect. To deal with its high caseload, the Departmet established a separate uit for small debts ad is takig steps to lik debts across taxes ad idetify higher risk debts. We examie these approaches i more detail below. Likig debts across taxes 2.6 We previously recommeded 7 that the Departmet should where appropriate pursue all debts owed o differet taxes durig iitial cotact with the debtor. The Departmet does ot i most cases lik all of a debtor s liabilities or idetify where taxpayers with debts are owed refuds across differet taxes because of limitatios i its IT systems. The Departmet does however lik ad maage joitly high value debts, debts uder Time to Pay ad debts beig submitted for distrait, couty court or civil recovery actio. Large debt collectio operatios i fiacial services, utilities ad overseas tax admiistratios have ivested i databases to eable them to view customers accouts as a whole. The Departmet has examied how to itegrate all taxes oto oe IT system, but has decided it does ot have sufficiet fudig for the project. 2.7 The Departmet caot readily establish how may taxpayers have debts o more tha oe tax. I a trial i early 2008, the Departmet examied more tha 2,000 VAT cases to see if they had debts o other taxes. Twety seve per cet of the cases, totallig 9.2 millio, also had direct tax debts, maily o PAYE. 2.8 Maagig each debt separately icreases the cost of collectio because of multiple cotacts with the taxpayer ad makes it more difficult to prioritise debts. Some debts are idividually of low value, but whe added to the taxpayer s other debts could become a higher priority. I the trial, the Departmet foud that 56 per cet of lower value VAT debts could be liked with other debts makig them higher priority ad it pursued 1.1 millio of debt sooer tha it otherwise would have doe. The Departmet estimates it could pursue a additioal 26 millio out of aroud 217 millio of VAT debt if it applied the same approach for all lower value VAT debts. Maagig small debts 2.9 I March 2008, 70 per cet of direct tax debts were less tha 500. I the 2008 trial the Departmet foud that 17 per cet of small debts could be liked. It established the Small Debt Uit followig the trial to review all debts uder 500 to establish whether they ca be liked with debts o other taxes ad pursued more quickly. I October 2008, however, it decided to redeploy the uit s resources to collect a wider rage of debts. 2.10 I some circumstaces legislatio allows the Departmet to adjust a taxpayer s tax code to collect certai self assessed Icome Tax ad tax credit debts through PAYE. A exercise by the Departmet estimated that some 540,000 cases, totallig almost 97 millio could be collected i this way. While some small debts are already collected i this way, the Departmet could make greater use of this approach. It plas to coduct small scale trials i 2008-09 to better uderstad both the customer reactio ad the costs of doig so. Taxpayer groups we cosulted suggested that, i collectig debts via the tax code, the Departmet should clearly explai how the debt has bee calculated ad provide the opportuity to appeal agaist adjustig the tax code as a method of recovery. 7 The recovery of Debt by the Ilad Reveue, HC 363, 2003-04. Maagemet of Tax Debt 15

part two Risk profilig of debts 2.11 The Committee of Public Accouts ad we previously recommeded that the Departmet adopt good practice used by other orgaisatios by developig scorig techiques to categorise taxpayers by risk. Risk scorig combies iteral ad exteral data such as socioecoomic data ad Credit Referece Agecy data to gai a isight ito the customer s behaviour ad level of idebtedess with other leders ad assig a score to debtors. The risk score ca be used to group customers with similar characteristics ad behaviours ad idetify the most appropriate collectio strategy for each customer groupig. Risk profilig also helps orgaisatios improve their uderstadig of customer behaviour ad improve future compliace. Risk scorig debtors allows orgaisatios to better support those who do ot uderstad their obligatios or are i fiacial crisis, while dealig promptly with debtors who deliberately pay late. Orgaisatios ca also idetify the total debt at risk because of isolvecy or likelihood of default. Box 1 describes the Netherlads tax authority s approach to risk scorig. 2.12 I September 2007, the Departmet bega a study for idetifyig higher risk, lower value debts. I the absece of fudig for fully automated risk profilig, it aims to make better use of staff kowledge ad its existig iteral ad exteral data sources, such as credit referece data, to develop more itelliget, targeted ad tailored itervetios for those idividual debtors who ca pay. It has coducted a separate risk modellig exercise to idetify ad rak VAT debtors who are more likely to pay, maily usig iteral data but has ot yet started approachig these debtors differetly. 2.13 The Departmet has tailored its approach o differet groups of debtors based o risk as part of other iitiatives. For example the Departmet foud that some types of debtor paid reasoably quickly after receivig the first demad ad it has used this iformatio to delay further recovery actio i such cases so as to deploy resources more effectively. 2.14 Other orgaisatios have sigificatly improved their performace through risk profilig. For example, a eergy supplier we spoke to used customer-level data to produce scorig models, segmeted customers ito groups ad tested alterative strategies o differet groups. They reported reductios i total debt of eight per cet ad debt greater tha six moths old of 28 per cet. Similarly, a debt collectio agecy reported improvemets ragig from 15 to 40 per cet i the amout collected for differet debtor groups followig the itroductio of risk scorig. 2.15 Risk profilig would also allow the Departmet to idetify more vulerable taxpayers. For example, the Departmet could tailor its iitial correspodece to the eeds of particular taxpayers ad could cotact taxpayers with relatively small debts but who would eed support i payig ad discuss paymet optios at a early stage. This could avoid smaller debts buildig up to sums that the taxpayer would have o hope of payig. BOX 1 Netherlads Tax Admiistratio s approach to risk modellig The Netherlads curretly has a two-track debt collectio approach. Taxpayers with a previous history of o-compliace are idetified ad fast-tracked through the system. They pla to itroduce a more developed risk processig system durig 2009: Step 1: Each taxpayer is assiged poits accordig to kow criteria, evets, behaviours ad previous compliace record e.g. the umber of times the taxpayer s direct debit bouced, the umber of times the taxpayer has bee issued paymet remiders, summos or distrait warrats, the umber of times the tax admiistratio has levied o goods or the umber of times the taxpayer applied for a paymet arragemet or waiver. Step 2: The poits are cosolidated to calculate a credit ratig for each customer so that the more compliat the taxpayer, the higher the credit ratig. The ratig ca chage over time accordig to behaviours ad evets. Step 3: The credit ratig determies the collectio treatmet. The Netherlads pla to have up to five collectio tracks. For example, remiders could be issued to taxpayers with high credit ratigs. More robust eforcemet actio such as levyig o goods, or eforced direct debit could be used immediately agaist less compliat taxpayers. Step 4: Moitor the impact o debt recovery performace over time so that it could fie-tue the system by varyig either the scorig or the respose. 16 Maagemet of Tax Debt

Part three The costs ad effectiveess of debt collectio methods This part examies the cost-effectiveess of the tracig uit, the Debt Maagemet Telephoe Cetre, the local Debt Pursuit Offices ad the Eforcemet ad Isolvecy Uit. It also draws o practice i the private sector ad overseas tax authorities. Measurig the effectiveess of differet collectio activities 3.1 Our previous report 8 cocluded that the Departmet required better iformatio o the amout of debt collected ad the average uit cost for differet methods of collectio to allow the Departmet to aalyse its success ad use resources cost-effectively. Although the Departmet ca measure the total debt collected for every 1 spet it caot yet measure the debt collected from all of its separate activities. Although some private sector orgaisatios are able to measure activity costs, most orgaisatios cosulted were, like the Departmet, i the process of researchig ad itroducig activity based costig. 3.2 Followig staffig reductios as part of the Departmet s drive for efficiecy savigs, Debt Maagemet directorate staff costs of debt collectio fell from 184.5 millio i 2006-07 to 170 millio i 2007 08. The directorate collected 310 of debt for every 1 spet i 2007-08, a icrease from 281 i 2006-07. 3.3 I 2008, the Departmet started work to develop activity-based costig although it has ot yet set a firm timetable. Ahead of results from this work, the Departmet provided summary data from which we have bee able to estimate some idicative costs per debt actioed for the mai high level collectio activities (Figure 8). The cost of actioig debts by the Telephoe Cetre is lower because it is desiged to process quickly high volumes of simpler debts. Recovery offices ad the Eforcemet ad Isolvecy Uit icur higher costs because the debts are more complex. Debts may be subject to oe or more itervetios before they are collected. 8 Cost of differet collectio activities Mai collectio activity 2007-08 2007-08 2007-08 2006-07 umber of debts Cost of activity Cost per debt Cost per debt actioed 1 (000s) ( m) actioed ( ) actioed ( ) Telephoe Cetre 3,108 14.6 4.71 4.75 Debt Pursuit Offices 8,032 137.6 17.13 20.16 Eforcemet ad Isolvecy 335 19.9 59.63 53.51 Overall 11,475 172.1 15.01 17.07 Source: Natioal Audit Office aalysis of HMRC data NOTES 1 Actioed meas that the debt has either bee paid i full or time to pay arragemets have bee agreed, or it has moved to aother stage i the recovery process or the Departmet has established that there is i fact o debt to pay. The Departmet does ot have iformatio o the umber or amout of debt actually collected by each collectio activity. 2 Both the umber of debts actioed ad the cost iclude tax credit overpaymets. It was ot possible to exclude these amouts. 8 The recommedatios i our previous report, ad i the report by the Committee of Public Accouts The Recovery of Debt by the Ilad Reveue HC 363, 2003-04, were made for Ilad Reveue. Maagemet of Tax Debt 17

part three Tracig debtors addresses ad telephoe umbers 3.4 The Committee of Public Accouts 9 oted that the former Ilad Reveue wrote off 55 millio (at 2002-03 prices) i 2002 because it could ot trace the taxpayer ad that 300 millio of debt over a year old related to cases where the Departmet did ot have up-to-date telephoe umbers ad addresses. The Committee recommeded that the Departmet should make maximum use of other Departmets records to fid taxpayers it caot trace, ad seek a legal power to require taxpayers to provide up to date cotact details. 3.5 While some taxpayers, such as VAT registered traders, are legally required to provide up-to-date cotact details, may are ot. The Departmet has cocluded that it should ot seek additioal legal powers to require all taxpayers to provide up-to-date cotact details because it cosiders the admiistrative burde o taxpayers would be too great ad because the requiremet could be difficult to eforce. It has, however, itroduced measures to improve its tracig of debtors addresses ad telephoe umbers ad ca obtai iformatio from the Departmet for Work ad Pesios, Driver ad Vehicle Licesig Agecy, local authorities ad other third parties. The 2008 Review of Iformatio Security at HM Reveue & Customs 10 suggested however that the Departmet s customers should have greater resposibility for maitaiig their records ad opportuities to maage this themselves, for example, through a olie accout. 3.6 Each year the Departmet refers to its Tracig Uit over 600,000 cases where it does ot have the correct taxpayer address. The Uit uses various iformatio to cofirm taxpayers addresses ad has itroduced ew IT tools ad deployed additioal staff as part of a Sped to Raise iitiative. 3.7 Sice 2005-06, the Departmet has reduced the total value of cases awaitig tracig by 52 per cet, from 366 millio to 177 millio. I 2007-08, the Departmet spet 10 millio o tracig. It estimates that it collected 114 millio more debt i 2007 by icreasig tracig activity. The Uit is meetig most of its targets, successfully tracig over 90 per cet of direct tax cases referred to the Uit. It has ot set targets for tracig VAT debtors. The Departmet wrote off over 300 millio i 2007 (Figure 9) because it could ot trace debtors, over three times the amout it wrote off i 2002. Of this, 210 millio related to direct taxes. I 2008, the Departmet wrote off 178 millio of idirect taxes, of which 139 millio related to VAT. It attributes the icrease i write-offs sice 2002 to icreased tracig activity ad a greater focus o high value debts, eablig the Departmet to idetify ad write off higher levels of utraceable debt. 3.8 The Departmet does ot have data o how may debtors have a icorrect or missig telephoe umber. Other orgaisatios icludig water compaies ad baks have high umbers of icorrect telephoe umbers: a medium-sized bak said it had iaccurate telephoe umbers o up to 50 per cet of cases. The Departmet has a cotract with a exteral provider to trace missig telephoe umbers. The Departmet does ot kow how much it costs to trace each telephoe umber. The estimated success rate i tracig umbers is aroud 19 per cet although the cotract does ot specify a target. If the exteral provider caot trace a umber, a Debt Pursuit officer visits the taxpayer s home or busiess address to pursue collectio. Usig the Telephoe Cetre to collect debt 3.9 The Committee of Public Accouts ad we previously recommeded that the Ilad Reveue should route all its tax debts through the automated Telephoe Cetre ad that this would be a importat step to esure that the ew HM Reveue & Customs had systems i place for maagig debts efficietly across its customer base. The Departmet s Telephoe Cetre ow deals with all self-assessed Icome Tax debt (except very high value debts) ad all PAYE debt as well as the Costructio Idustry Scheme ad tax credit overpaymets. The Departmet plas to start routig Corporatio Tax 9 Level of write offs because the Departmet could ot trace the debtor 2002 2006 2007 2008 ( m) ( m) ( m) ( m) Direct tax write-offs 63 77 210 Not yet available Idirect tax write-offs 22 95 126 178 Total write-offs 85 172 336 Source: Natioal Audit Office Aalysis of HMRC data NOTE All figures are i real terms. Write off figures based o data at the ed of October for direct taxes ad ed of March for idirect taxes. Direct tax write-offs iclude Natioal Isurace Cotributios for 2006 owards. 9 Committee of Public Accouts 49th Report, The Recovery of Debt by the Ilad Reveue, HC 363 2003-04. 10 Review of Iformatio Security at HM Reveue & Customs, Kiera Poyter, Jue 2008, paragraph xii.19. 18 Maagemet of Tax Debt

part three debts through the Telephoe Cetre by the ed of 2008. The Cetre does ot collect VAT debts. I total, 620 full time equivalet staff work i the Telephoe Cetre which costs aroud 15 millio a year to ru. It deals with 2.4 millio calls a year, ad it actioed aroud 1.1 millio cases i 2007-08, a icrease of 28 per cet over 2006 07. Actio take may ivolve collectig the debt or passig the case to the Debt Pursuit Office or tracig uit. Although the Departmet measures the amout of debt it collects i total, it does ot separately idetify how much debt is collected by the Telephoe Cetre. 3.10 The Telephoe Cetre is desiged to process high volumes of simpler debt cases. It costs the Departmet aroud 4 to actio each debt through the Telephoe Cetre, compared to aroud 17 for Debt Pursuit Offices (Figure 8). We estimate that icreasig the umber of debts the Telephoe Cetre actios by 15 per cet (with a correspodig reductio i the umber of debts actioed by pursuit offices) could save aroud 6 millio a year i collectio costs. Usig the Telephoe Cetre to actio higher volumes of debts more quickly would also icrease cashflow to the Exchequer. Iitial research by the Departmet has idetified various ways to icrease the cost-effectiveess of the Telephoe Cetre, although it has yet to assess the likely beefits ad costs ad the level of fudig that ca be made available: Usig staff time more effectively by miimisig dowtime by updatig the IT system outside Telephoe Cetre opeig hours, traiig staff to hadle a wider rage of taxes ad by routig calls more itelligetly to advisers with appropriate skills for the type of call. These chages would allow the Departmet to collect debt more quickly ad make savigs. It is explorig the costs of extedig system availability with its IT parters. Icreasig the staffig outside ormal office hours to better match whe certai customers are most likely to be cotactable by telephoe. Oe orgaisatio we cosulted said that it reached the right perso i 16 per cet of cases durig ormal office hours, risig to 27 per cet betwee 18.00 ad 20.00. The Departmet also foud that its cotact rates icreased from 42 per cet i ormal office hours, to 47 per cet i the eveig ad 45 per cet at the weeked. The Departmet plas to icrease staff workig outside ormal office hours by the ed of 2008. Usig the Telephoe Cetre to collect VAT debt ad to make follow-up telephoe calls o self assessed Icome Tax ad PAYE where, for example, a promise to pay has ot bee kept. I April 2008, the Departmet started explorig implemetatio of these chages which could reduce the costs of Debt Pursuit Offices which curretly perform this work. It is ivestigatig ways to fud system chages which will eable the Telephoe Cetre to make follow-up telephoe calls, ad is plaig a pilot o collectig VAT through the Telephoe Cetre i late 2008. Maximisig call cetre availability by itroducig ew techology which would switch staff automatically betwee iboud ad outboud calls accordig to iboud call volumes. At preset, the systems are switched maually betwee i ad outboud calls aroud twice a day to cope with demad. The Departmet estimates that staff sped ie per cet of their time waitig for the system to be chaged. The Departmet expects to have automatic switchig fuctioality i place by April 2009 as it itroduces Voice over Iteret Protocol. 11 Local debt recovery 3.11 The Departmet has a etwork of local Debt Pursuit Offices which deal with debts the Telephoe Cetre is uable to collect as well as other debts which are set straight to them. The Departmet is curretly ratioalisig its etwork to icrease busiess efficiecy ad to realise estates savigs as part of a wider departmetal estates ratioalisatio. It is cosiderig closig aroud two thirds of Debt Pursuit Offices. At September 2008, the Debt Maagemet directorate had withdraw from 17 of 147 locatios. 3.12 Local debt recovery icludes visitig debtors, seizig goods, servig legal papers ad attedig Court or Commissioers hearigs as well as collectig ad processig paymets ad providig local help ad advice to help esure future paymet compliace. The Departmet coducted aroud 576,000 face-to-face visits i 2007 08 with a average retur of 1,100. The effectiveess of face to-face visits depeds o whether the officer makes cotact with the debtor. Most visits curretly take place durig ormal office hours which may be suitable for some debtors but ot others. The Departmet recogises that the cotact rates achieved o visits with debtors is low, particularly o self-assessed Icome Tax ad i ier cities. The Departmet estimates that i 2007-08, o aroud 45 per cet of visits, staff made face to face cotact with the debtor, spoke to someoe else who kew the debtor or acquired a telephoe umber from the address. I over half of the remaiig visits, the officer left a letter without beig able to cofirm the address was correct. 11 Voice over Iteret Protocol is used to trasmit voice coversatios usig the iteret. Maagemet of Tax Debt 19

part three 3.13 The Departmet developed the Fieldforce project to improve the efficiecy ad effectiveess of face to face visits. I Jauary 2008, there were some 6.8 millio debts o had across all Debt Pursuit Offices. The Departmet plas to cetralise some admiistrative work such as preparig case files for couty court claims, but face to face visits ad court attedaces require local presece. The Departmet cosidered outsourcig face to face visits but decided to develop a i-house approach Fieldforce. Pilot work coducted i 2006 idetified improvemets through creatig a specialised workforce, icreasig flexible workig, cetralisig support ad usig remote techology. Cotact rates 12 o the pilot icreased from 65 per cet to 70 per cet ad officers collected o average 1,250 per visit compared with a atioal average of 1,100. The Departmet idetified three optios for takig Fieldforce forward, with escalatig beefits depedig o icreases i the cotact rate. It is implemetig a cost eutral optio which aims to icrease cashflow by 29 millio over five years. 3.14 The Departmet started to roll out Fieldforce across the coutry i autum 2007 ad by September 2008 it had bee operatioal i oly oe out of 12 geographical areas for more tha six moths. The Departmet aims to icrease visits which result i cotact with the debtor by 0.2 visits per day to 5.5 by improvig support for staff ad improvig quality cotrol. Full implemetatio would icrease visits to 7.8 per day. Our bechmarkig work idetified a debt collectio agecy who said that their bailiffs make o average 15 cotact visits per day. The differece betwee the cotact rates achieved by these bailiffs ad the Departmet s distrait officers may i part reflect differeces i the ature of the work they carry out. For example, the Departmet s officers aim to educate ad support debtors i payig o time, which some bailiffs may ot do, depedig o the sorts of debts they are recoverig. The daily visit rate achieved by the private sector bailiffs idicate the opportuities for potetially greater levels of cotact with more flexible workig hours. 3.15 The Departmet has had to resolve various issues. Iteral applicatios for both Fieldforce officers ad support staff were lower tha expected ad may have bee iflueced by staff cocers about wider staff reductios, the Departmet s policy o remote ad mobile workig ad related issues aroud pay ad allowaces. Fewer Fieldforce officers tha expected voluteered for flexible workig (offered without paid overtime) ad i April 2008, 90 per cet of visits i a operatioal Fieldforce area were coducted durig office hours rather tha at other times of day. I Lodo recruitmet was suspeded pedig resolutio of the Departmet s policy o remote workig. The Departmet has ow agreed the remote ad mobile policy with the Trade Uio although some implemetatio issues have still to be resolved. It expects this will help ecourage more flexible workig by emphasisig beefits both to the busiess i terms of collectig more debt ad to staff i terms of work life balace. 3.16 The Departmet has estimated that Fieldforce could brig potetially greater beefits if fudig ca be made available. It estimated it could icrease cashflow by a further 385 millio by itroducig more IT to eable staff to work remotely, facilities for doorstep direct debit paymets, automatig support work ad satellite avigatio to help staff travel more efficietly betwee visits. It is itroducig satellite avigatio for all Fieldforce staff ad has idetified a potetial IT solutio which could cost a estimated 8.3 millio over five years. Eforcemet of debt through isolvecy 3.17 The Departmet s Eforcemet ad Isolvecy Service is resposible for settlig the debts of idividuals ad busiesses where Debt Pursuit Offices have bee uable to do so. It cotacts the taxpayer to issue a statutory warig 13 that the Departmet may petitio for bakruptcy or liquidatio if the taxpayer does ot arrage paymet or dispute the debt. If a taxpayer is made isolvet, the Departmet receives a share of ay assets recovered ad writes off the remaider of the debt. By pursuig isolvecy, the Departmet also prevets further debt accruig. 3.18 I 2007-08, the Service took o 5.7 billio of debt from Debt Pursuit Offices. It recovered 1.1 billio i the same year. Its success i recoverig debt varies across taxes. I 2007-08, it recovered 26 per cet of its workload o direct taxes, up from 24 per cet i 2006 07, compared to a 20 per cet target. The percetage of VAT debt recovered is lower at five per cet, which the Departmet attributes to greater levels of VAT beig writte off because of Missig Trader fraud. The Departmet recovers most of the debt whe bakruptcy actio prompts the taxpayer to settle. A relatively small amout is recovered directly through bakruptcy, although the Departmet does ot record this data because of admiistrative costs. The Departmet estimates that it recovers aroud four pece for every 1 of debt through bakruptcy, i lie with the retur achieved by other orgaisatios. Because of the low retur o isolvecies, other tax authorities we visited used other eforcemet methods to recover debts as described i paragraph 3.21 ad 3.23. 12 The Departmet defies the cotact rate as face to face cotact with the debtor, speakig to someoe else who kows the debtor or acquirig the telephoe umber from the address. 13 Statutory Demad otices issued for bakruptcy proceedigs ad Seve Day Warig Letters issued for liquidatio of compaies. 20 Maagemet of Tax Debt

part three 3.19 The Departmet achieves a higher retur, estimated at 60 pece for every 1 of debt, whe the debtor proposes a Volutary Arragemet 14 with its creditors. The Departmet collected 41 millio through Volutary Arragemets i 2007-08 ad the umber of Volutary Arragemets icreased from aroud 4,000 i 2001 to aroud 10,000 i 2007-08. Other orgaisatios have experieced a icrease i Volutary Arragemets ad report that aroud a third fail. Sice 2007, the umber of all Volutary Arragemets i Eglad ad Wales has falle by 12 per cet. 15 The Departmet does ot record iformatio o how may of its Volutary Arragemets fail but expects this iformatio to be available i 2009. Other eforcemet methods 3.20 Our previous report recommeded that the former Ilad Reveue explore the beefits ad implicatios of requirig compaies with a poor paymet record to provide bak guaratees ad/or set up separate bak accouts ito which taxes deducted should be immediately trasferred. The Departmet s eforcemet powers vary across taxes because it has iherited them from the former Ilad Reveue ad HM Customs & Excise. As part of the Departmet s review to alig powers across the Departmet 16, it cosulted o whether it should have the power to collect debts by securig taxpayers assets i the same way that it curretly collects debts by removig goods. May respodets were cocered that the proposal would have isufficiet safeguards ad could create hardship. The Departmet plas to aouce the results of its cosultatio by the ed of 2008. 3.21 Other overseas tax admiistratios have stroger eforcemet powers. For example, the Netherlads tax authority ca recover tax debts from the taxpayer s salary at source ad ca arrage a direct debit o the taxpayer s bak accout. Taxpayers uable to pay because of hardship ca apply for the tax to be waived. Similarly, the US Iteral Reveue Service ca establish a claim agaist debtor s property as security agaist the debt, called a lie. They fid it a powerful tool ad most debtors get i cotact quite quickly as it appears o the debtors credit records ad is a public record. The Irish Reveue has power to serve a order o a bak requirig it to use positive balaces o the debtor s accout to pay outstadig tax directly to the Reveue. It collects aroud 25 per cet of the amouts specified o such orders. The Departmet ca oly recover tax debts from a debtor s salary at source or from their bak accout through couty court actio. 3.22 I our previous report, we recommeded that the Departmet cosider sellig o some of the hardest to collect debt where it is cost-effective to do so. Orgaisatios we cosulted i our bechmarkig work ow pass debts to exteral collectio agecies (where a orgaisatio pays a agecy commissio for debts collected) or debt buyers (where the debt is sold) sooer tha before to collect debts as quickly as possible. For example, oe bak places debt with a agecy after 180 days, ad aother sells debt after six moths. 3.23 The US Iteral Reveue Service ad the Australia Tax Office have used private sector debt collectio agecies. I 2006, the Australia Tax Office passed 11,000 low value, o complex busiess debts totallig (AUS)$60 millio to a agecy, which collected aroud (AUS)$21 millio. It has ow implemeted the programme o a larger scale, passig primarily low value debts to agecies to seek paymet i full or a paymet arragemet. All other eforcemet actio is take by the Australia Tax Office. 3.24 The Iteral Reveue Service has used two private debt collectio agecies sice September 2006. It collected $31 millio i 2006-07 by resolvig aroud ie per cet of more tha 100,000 low-value cases set to them. This amout was less tha the $46 millio origially plaed, partly because there were fewer easy to-collect debts ad partly because the programme has ot expaded i the way the Iteral Reveue Service plaed. 3.25 Both tax authorities faced parliametary ad media criticism o passig taxpayer iformatio to exteral agecies, although the umber of taxpayer complaits was low i both cases. The Iteral Reveue Service foud it time cosumig to maage the cotracts ad to esure that the agecies complied with its stadards. 14 Volutary Arragemets, i which a debtor ad all its creditors make a formal agreemet regardig paymet of debts, were itroduced i the UK by the Isolvecy Act 1986 to support viable busiesses experiecig temporary fiacial difficulties. 15 The Isolvecy Service, Isolvecy Statistics Secod Quarter 2008, 1 August 2008. I April-September 2008, Volutary Arragemets i Eglad ad Wales fell by 12 per cet agaist the same period i 2007. 16 Moderisig Powers, Deterrets ad Safeguards, Paymets, Repaymets ad Debt: The Developig Programme of Work, 25 Jue 2007. Maagemet of Tax Debt 21

Part four Prevetig debt arisig This part examies the reasos taxpayers get ito debt, the iformatio available to them, paymet arragemets ad the pealties used by the Departmet to ecourage paymet o time. Level of debt arisig 4.1 I 2007-08 aroud 30 per cet of taxpayers with a tax liability did ot pay o time. Sice 2003-04 the umber of employers payig PAYE o time has icreased from 53 per cet to 65 per cet, while the umbers of idividuals ad compaies payig o time has falle slightly. Prevetig debt from arisig i the first place ca be more cost-effective tha seekig to recover debt. Reasos why taxpayers get ito debt 4.2 We commissioed Ipsos MORI to iterview curret or former tax debtors to better uderstad attitudes to debt ad why people get ito tax debt. The 26 iterviews, together with research udertake by the Departmet, show that there are various reasos why taxpayers do ot pay tax o time. Small busiesses may have difficulties i maagig their cashflow, particularly where they eed to pay tax i a lump sum or if mothly paymets are due before they receive paymet from customers. Taxpayers may also miss paymets because they are ot aware of deadlies, have difficulty keepig records to calculate what they owe or if other debts take priority over tax. Busiesses which have become isolvet may also owe tax. Taxpayers with multiple icomes (icludig pesioers ad studets) may have arrears because they have ukowigly bee payig the wrog amout of tax. Debt also arises because of uexpected crises i people s lives such as serious illess or family breakdow. 4.3 Some people do ot pay their tax o time i the hope that they will ot be pursued further. This group may repeatedly dispute the amout they owe or avoid cotact with the Departmet. Some do ot pay o time as a way of actively maagig cashflow (Box 2) because they view tax paymets as less importat tha payig suppliers. Others do ot see beig i tax debt as udesirable. For example, oe former self-assessed Icome Tax debtor told us: I do t thik there s the stigma that there used to be, ot at all. There s hardly aybody I kow that is t i debt i some form or aother. BOX 2 Example of how some taxpayers avoid payig tax o time to maage their cashflow Matthew ows a small busiess that acts as a aget, sourcig ad sellig stock betwee producers ad suppliers. After busiess icreased, he decided to chage status from sole trader to a limited compay. He got ito Corporatio Tax debt i 2002 after chagig ecoomic coditios meat that the larger compaies he dealt with moved from a 30 day to 90 day ivoicig period ad reegotiatio of back-dated sales led to a smaller tha expected turover. The chage i timig meat that cashflow became a problem, ad he started to use the moey saved for tax to pay his suppliers. If my suppliers do t trust me to pay what I owe, they will use someoe else. Tax was a secodary cocer. Source: Ipsos MORI research for Natioal Audit Office 22 Maagemet of Tax Debt

part four Clearer iformatio for taxpayers 4.4 The Committee of Public Accouts previous report 17 foud that the Departmet s leaflets were out of date ad that the website did ot provide importat iformatio o helplies ad sources of advice. It recommeded better iformatio for taxpayers about paymet ad debt recovery arragemets. The Departmet has improved the iformatio available i leaflets o some taxes ad o the iteret to help taxpayers to kow whe tax is due, how to pay ad the implicatios if they do t pay. It has also made improvemets to the layout, search fuctio ad avigatio of its website. Figure 10 shows improvemets made by the Departmet ad areas where our research showed taxpayers would beefit from clearer iformatio, icludig iformatio o how tax debt is calculated. 10 Area Iformatio for taxpayers Good iformatio provided Areas where iformatio could be improved Iformatio provided i paper form or o the website Clear iformatio o paymet dates ad deadlies, paymet optios ad pealties. There is a what to do if I have problems payig sectio o the website with iformatio o availability of time to pay, factsheets o eforcemet methods ad liks to volutary orgaisatios which may be able to provide help ad advice. Leaflets o some taxes (for example, tax credits) cotai clearer iformatio for people with problems payig. Iformatio o iterest rates charged o overdue taxes are i a differet sectio of the website to tax-specific pealty iformatio. O other taxes (for example VAT, Corporatio Tax), leaflets with iformatio for people with problems payig are more limited although more extesive iformatio is available o the website. Telephoe paymet helplies The how to pay helplie 0845 366 7816 ad the Self Assessmet Paymet Helplie 0845 366 1204 are ope 8.00 20.00 Mo-Fri ad 8.00 16.00 Sat. The Natioal Advice Service Paymet helplie 0845 010 9000 for VAT ad other idirect taxes is ope 8.00 20.00 Mo Fri. Liks to the paymet helplie from other areas of the website (for example Corporatio Tax, PAYE) are difficult to fid. Prited guidace o Self Assessmet does ot provide the Self Assessmet Paymet Helplie umber. Olie Services Registered taxpayers ca receive email remiders for major taxes. Email remiders of tax filig ad paymet dates are available from the Busiess Lik website. This optio is ot available for Corporatio Tax. Cocers about how reliable the remiders are. Specific iformatio about a taxpayer s affairs Registered Self Assessmet ad Corporatio Tax taxpayers ca view their accout details olie icludig historical details of amouts paid. Statemet of Accout for self assessed icome taxpayers shows more clearly what taxpayers owe. Agets ca view registered cliets accout details olie. Olie accout ot available for VAT or PAYE taxpayers. Self Assessmet Icome Tax retur could be clearer that taxpayers must submit a retur if they are set oe eve if they have o tax to pay. If they do ot file a retur, the Departmet s assessmet of tax owed will become a debt util the retur is filed or debt paid. Some laguage used is difficult to uderstad, eg a determiatio where the Departmet has raised a assessmet for the estimated tax due i the absece of a retur. It is difficult for some taxpayers to uderstad how tax has bee calculated. Source: Natioal Audit Office 17 Committee of Public Accouts 49th report, The Recovery of Debt by the Ilad Reveue, 2003-04. Maagemet of Tax Debt 23

part four 4.5 The Departmet curretly cotacts taxpayers by letter or telephoe about payig tax due. Leadig debt collectio orgaisatios are expadig the ways i which they cotact customers. We spoke to a large water compay, debt collectio agecy ad a bak that all use SMS text messagig. A large eergy compay is triallig iteractive voice recogitio software 18 ad SMS text messagig with customers who do t respod to other types of cotact. It said cotact rates for SMS were aroud 12 per cet compared with two per cet for voice recogitio software. At aroud 5p per text, more tha 10,000 messages ca be set istatly for approximately 500 (agaist, for example, 2,300 o postage for 10,000 letters). Other orgaisatios use automated telephoe messagig to remid customers that paymets are due ad to ecourage debtors to cotact them. For example, a large utility compay we cosulted said that 20 to 25 per cet of debtors called back after text or voicemail with a paymet rate of eight to te per cet. A debt collectio agecy told us that over 70 per cet of its telephoe collectio activity ivolves leavig automated messages. I October 2008, the Departmet bega pilotig voicemail for a small sample of low value debts ad is also cosiderig explorig how it could use text. Alterative paymet methods 4.6 Paymet optios vary (Figure 11) ad are determied by the legislatio for each tax. Some paymet optios, such as paymet over the iteret by debit card are ot curretly available for all taxes. Paymet over the iteret is icreasig; olie trasactios have icreased by 44 per cet i the last year. 4.7 Over 40 per cet of paymets are by direct debit, the Departmet s preferred paymet method. VAT taxpayers ca set up direct debits olie. From July 2008, taxpayers have bee able to set up direct debits by telephoe for other taxes. The Departmet expects to offer olie direct debit services o all taxes from late 2008. 4.8 I 2004, the Committee of Public Accouts recommeded that the Departmet explore the beefits ad implicatios of providig the facility to pay by credit card. I 2008 the Govermet itroduced legislatio to accept paymet by credit card ad to pass o the merchats hadlig charge to the taxpayer at the time of paymet. The Departmet curretly expects to itroduce paymet by credit card over the telephoe by the ed of 2008 ad olie i early 2009. 11 The paymet methods available for each tax self-assessed Icome Tax PAYE Corporatio Tax vat Iteret/telephoe bakig (BACS Direct Credit) yes yes yes yes Debit card over the iteret ( Billpay ) yes yes No From Oct 2008 Debit card over the telephoe yes yes yes yes Bak Giro (by cheque or cash at bak brach) yes yes yes yes Post Office (by cheque, cash or debit card) yes yes yes No Cheque set by post to Accouts Office yes yes yes yes CHAPS /a yes yes yes Paymaster (for employers who have a /a yes yes yes accout with Office of Paymaster Geeral e.g. Govt depts, health authorities) Credit card From late 2008 From late 2008 From late 2008 Yes Source: Natioal Audit Office review of HMRC website NOTE BACS Bak Automated Clearig System; CHAPS Clearighouse Automated Paymet System (for same day paymet). 18 Iteractive voice recogitio software directs callers with voice prompts to select from a defied set of choices. Customers ca make choices usig either the umber pad o the telephoe or by statig their choices out loud. 24 Maagemet of Tax Debt

part four 4.9 Other orgaisatios offer various paymet methods which the Departmet curretly does ot. Large utility compaies use autopaymet, where callers ca make paymets usig the telephoe keypad rather tha speakig to a operator. Autopaymet reduces the umber of staff required to aswer calls ad process paymets ad ca also appeal to customers who prefer ot to speak to a operator. Utility compaies offer Paypoit ad may local authorities accept coucil tax paymets through Payzoe, both of which allow customers to pay household bills at shops such as ewsagets. Paymets are usually made i cash, helpig customers without bak accouts to pay. The Departmet has o plas to offer these paymet methods. Timig of paymets 4.10 Taxes have differet statutory paymet dates which ca make it complicated for taxpayers to remember deadlies, uderstad their total tax liability ad schedule paymets, especially whe there is a time lag betwee moey beig eared ad tax beig due. Most employers pay PAYE mothly, VAT is usually paid quarterly ad self assessed Icome Tax every six moths or aually ad Corporatio Tax aually. May taxpayers are liable for more tha oe tax, for example the Departmet estimates that 850,000 compaies have both Corporatio Tax ad VAT liabilities. Of these, 600,000 operate at least oe PAYE scheme. 200,000 uicorporated busiesses have Icome Tax, PAYE ad VAT liabilities. 4.11 A recet review by the OECD 19 of programmes to reduce the admiistrative burde of tax regulatios suggested that coutries could cosider aligig VAT ad other periodic tax liabilities. Tax authorities i Australia, Demark ad Swede are itegratig busiess tax obligatios to reduce costs ad icoveiece of complyig with complex tax regulatios. The Departmet s research foud that small busiesses would ot welcome the same paymet date o differet taxes as this would disrupt their cashflow. Several debtors Ipsos MORI spoke to o our behalf would prefer a mothly tax paymet schedule to alig with other busiess paymets but this optio is ot ope to all taxpayers. The Departmet cosulted o flexible paymet schemes i Jue 2007 20 ad followig resposes, it developed proposals to eable Icome ad Corporatio Taxpayers to pay usig regular mothly istalmets. Further cosultatio is plaed for late 2008. Surcharges ad iterest for taxpayers who do t pay o time 4.12 The Departmet charges iterest ad/or applies surcharges o tax that is ot paid o time. At October 2008 the iterest rate charged by the Departmet was 6.5 per cet for most taxes which is low compared to some forms of borrowig. The surcharges the Departmet imposes for late paymet also vary by tax (Figure 12 overleaf). I Jue 2008, the Departmet bega cosultatio o iterest ad pealty regimes aimed at achievig greater aligmet of rules across the taxes with a view to itroducig ew legislatio i 2009. 21 4.13 Research with taxpayers suggests that the escalatig charges o late paymet of VAT ca be effective i icetivisig paymet o time. Oe taxpayer commeted: The actios were effective, partly because of what I felt was a ridiculous charge for ot makig the paymets o time. I make sure that I make those paymet dates. It s just ot worthwhile ot doig that I suppose if I did t sed them a cheque, I m sure they d be o my doorstep fairly quickly. Other taxpayers surveyed by the Departmet did ot cosider that the five per cet charge for late paymets of self-assessed Icome Tax was a sufficiet deterret as curret borrowig rates are similar. I particular, the charge is ot imposed util 28 days after the due date. Oe taxpayer oted: It s better to owe them [the Departmet] tha the bak I always pay, before the ed of February, because they say it s iterest free up util the. Taxpayer groups we cosulted cosidered that pealties would ot icetivise paymet o time for some taxpayers i real fiacial distress. 19 OECD Forum o Tax Admiistratio: Taxpayer Services Group, Programs to reduce the admiistrative burde of tax regulatios i selected coutries, Jauary 2008. 20 Moderisig Powers, Deterrets ad Safeguards: Paymets, Repaymets ad Debt: The Developig Programme of work, 25 Jue 2007. 21 Iterest Workig Towards a Harmoised Regime, 19 Jue 2008. Moderisig Powers, Deterrets ad Safeguards: Meetig the obligatios to file returs ad pay tax o time, 19 Jue 2008. Maagemet of Tax Debt 25

part four 4.14 I our previous report, we recommeded that the Departmet itroduce pealties for all employers who are late i payig PAYE durig the year. 22 I 2008, the Departmet cosulted o chages to pealties for late paymet. 23 Proposals iclude applyig a fixed sum pealty immediately or shortly after the due date for self assessed Icome Tax ad possible chages to the PAYE pealty regime with the aim of ecouragig employers to pay their i-year PAYE o time. The Departmet has also cosulted o ways to improve the collectio of Natioal Isurace cotributios from the self employed. 24 The Departmet estimates that 60 per cet of Class 2 cotributios are paid withi 28 days of the date of quarterly bills, compared with 99.5 per cet of those paid by direct debit. Give the low weekly rate of Class 2 cotributios, the Departmet cosiders it difficult to desig effective ad proportioate pealties. It is cosiderig makig it easier for taxpayers to pay o time by improvig iformatio ad chagig the timig of paymets as well as by itroducig iterest charges o late paymets. 4.15 The Australia Tax Office imposes a iterest charge o ay tax debts that remai upaid. The charge is applied daily at compoudig rates well above the cost of fiace. The New Zealad tax authority charges a reduced pealty if the taxpayer eters ito a Time to Pay arragemet before the due date to ecourage taxpayers to get i touch before they get ito debt. The Departmet is cosultig o proposals to charge reduced pealties if the debtor eters ito a Time to Pay arragemet by the due date. 25 4.16 Some orgaisatios icetivise customers to pay i a way that reduces the risk of late paymet, such as offerig a discout to those who pay by direct debit or chargig extra if customers do ot have a direct debit arragemet. I 2004-05, the Australia Tax Office offered small busiesses ad idividuals a oe-off opportuity to clear outstadig tax debts. 450,000 debtors with a associated debt of ($AUS)1.5 billio were offered reduced iterest if they set up a direct debit from their bak accout, filed all outstadig returs ad paid o time i future. At the same time, they took firmer actio with those debtors who did ot respod to their offer. Almost 128,000 taxpayers fialised their debts with paymets totallig ($AUS)864 millio. Workig with others to prevet debt arisig 4.17 The Departmet works with represetative bodies to idetify ways to help taxpayers to comply with obligatios to pay their tax o time. For example, a sub-group of the Departmet s employer forum meets to cosider debt issues ad the Departmet has also established a volutary sector liaiso group ad atteds the Moey Advice Liaiso Group, a discussio forum comprisig creditors, debt collectio agecies ad debt advisers. Members of our advisory pael told us that the Departmet cosults more o debt issues tha previously. The Departmet works closely with the OECD s Cetre for Tax Policy ad Admiistratio, for example co-hostig a coferece o debt aalysis, ad aims to lear lessos from other orgaisatios that collect debt. 12 Surcharges for late paymet Tax Self-assessed Icome Tax Surcharges Five per cet charge is added to tax upaid 28 days after the due date. A additioal five per cet charge is made if the tax remais upaid six moths after the due date. Numbers of surcharges issued i 2007-08 482,599 PAYE Large employers ad others payig electroically ca icur surcharges for late i-year paymet. No surcharge payable i-year for other late paymets of PAYE. Iterest payable at ed of year for late i-year paymets. 512 Corporatio Tax No specific surcharges for late paymet. N/A VAT Escalatig charges depedig o the umber of occasios that paymets are late. 330,000 Source: Natioal Audit Office review of HMRC website ad HMRC data 22 The recovery of Debt by the Ilad Reveue, HC 363, 2003-04. 23 Moderisig Powers, Deterrets ad Safeguards: Meetig the obligatios to file returs ad pay tax o time, 19 Ju 2008. 24 Moderisig Powers, Deterrets ad Safeguards: Improvig the collectio of Natioal Isurace Cotributios from the self-employed, 12 March 2008. 25 Moderisig Powers, Deterrets ad Safeguards: Meetig the obligatios to file returs ad pay tax o time, 19 Jue 2008. 26 Maagemet of Tax Debt

Appedix XXX oe Progress agaist previous Committee of Public Accouts Recommedatios This Appedix summarises the Departmet s progress agaist the recommedatios made i the Committee of Public Accouts report The Recovery of Debt by the Ilad Reveue, 49th Report 2003-04 ad o VAT debt from the Customs ad Excise Stadard Report HC 447, 2004-05. Part Oe Overall performace i maagig tax debt Recommedatio The Departmet should seek to achieve similar debt clearace rates to the utilities sector. Treasury Miute respose, Jauary 2005 The Departmet oted the recommedatio. It said that it prioritised high value debts ad takes early actio i pursuig cases, but has to balace this agaist the overall volume of cases. Curret positio The Departmet has ot developed performace idicators which would help it compare clearace rates agaist the utility sector (paragraph 1.4). The Departmet s performace measures should iclude, for all types of tax ad atioal isurace cotributio debt, the percetage of taxpayers who pay o time, the percetage of debt collected withi 30 days ad the percetage collected withi 90 days. The Departmet agreed with the recommedatio. It had service delivery targets for the percetage of taxpayers that paid o time across the major direct taxes. It was reviewig its performace measures ad expected to iclude 30 ad 90 day ad six moth targets. The Departmet cotiues to measure percetage of taxpayers who pay o time across the major taxes. The Departmet ca measure average time take to collect debt but ot the percetage of debt collected withi 30 ad 90 days (paragraph 1.4 1.5 ad Figure 2). The Departmet eeds to establish clear procedures to review ucollectible debt cases regularly, with targets set for their resolutio. The Departmet should promptly otify ad record all VAT debt o the Trader Register so that it ca actively maage it. The Departmet should see how its performace o the collectio of VAT debt ow compares with that of other EU member states. Treasury Miute respose, February 2006 The Departmet accepted the recommedatio. It had reviewed collectio procedures ad issued improved guidace. Improvemets to the computer system esured all debt was brought ito debt maagemet. The Departmet was developig performace measures aimed at more effectively maagig the ucollectible elemets of debt durig 2006-07. The Departmet accepted the recommedatio. The majority of VAT debt was dowloaded promptly oto the Trader Register, although there were some mior maagemet iformatio issues remaiig. The Departmet is part of the OECD s Tax Admiistratio Compliace Sub-Group to share kowledge ad best practice with other tax authorities. The Departmet does ot have performace measures aimed at ucollectible debt. All idirect tax debts are dowloaded oto the Trader Register promptly. A Study Group o the Europea Orgaisatio of Supreme Audit Istitutios (EUROSAI) chaired by the UK Natioal Audit Office preseted a report Bechmarkig of Tax Admiistratios: Report of the EUROSAI Study Group i Jue 2008 to the EUROSAI Cogress. The report develops a categorisatio of performace measures which reflect the activities of most tax admiistratios core activities ad uses VAT as a case example to illustrate bechmarkig i practice: www.eurosai.org. Maagemet of Tax Debt 27

appedix oe Part Two Maagig ad prioritisig debt Recommedatio The Departmet should aalyse the debt record of differet types of taxpayer ad use risk scorig techiques to idetify the eed for early actio to support those taxpayers who are more likely to get ito debt. Treasury Miute respose, Jauary 2005 The Departmet agreed with the recommedatio ad said that the Itegrated Debt Maagemet System was the first step towards risk profilig. It plaed to itroduce more sophisticated risk profilig i lie with best practice but it would eed to be cosidered agaist other priorities. Curret positio The Departmet does ot routiely risk score. It started a risk scorig study i 2007 for idetifyig higher risk, lower value debts. The project is i its early stages (paragraphs 2.12 2.13). Part Three The costs ad effectiveess of debt collectio methods Recommedatio The Departmet should make maximum use of other Departmets records to fid taxpayers it caot trace ad seek a legal power to require taxpayers to provide up to date cotact details. Treasury Miute respose, Jauary 2005 The Departmet oted the recommedatio. It said it had a umber of iformatio gateways with other govermet departmets ad withi its existig powers ad that it was takig steps to improve its tracig service by brigig together all available data services ito oe uit. The first trache of improvemets were delivered i July 2004. It was also ivolved i cross-departmetal work which looked at how taxpayer cotact details are provided ad maitaied across govermet. It was plaig to cosult o its powers to obtai iformatio. Curret positio The Tracig Uit has more sources of iteral ad exteral data ad is meetig most of its targets (paragraphs 3.5 ad 3.6). The Departmet has cocluded that it should ot seek additioal legal powers to require all taxpayers to provide up-todate cotact details because it cosiders the admiistrative burde o taxpayers would be too great ad because the requiremet could be difficult to eforce (paragraph 3.5). The Departmet cosulted o requirig third parties, such as agets, accoutats, baks ad utility compaies, to provide them with cotact details i the cosultatio paper Paymets, Repaymets ad Debt: the Developig Programme of Work. HMRC are cotiuig to develop this suggestio with a view to further cosultatio. The 2008 Review of Iformatio Security at HM Reveue & Customs (Keira Poyter, Jue 2008) suggested that the Departmet s customers should have greater resposibility for maitaiig their records ad maagig them themselves (paragraph 3.5). To improve efficiecy, all debts should iitially be pursued through the Departmet s Telephoe Cetre. All debts should moreover be hadled through the Departmet s Itegrated Debt Maagemet System. The Departmet agreed with the recommedatio. I October 2004 tax credits were moved o the Itegrated Debt Maagemet System. It expected that by mid 2005 all major taxes would be hadled o this system. It also said that the Telephoe Cetre would iitially pursue the vast majority of debts, although some, o a risk basis, would be set directly to local offices. All direct tax debts are ow icluded o the Itegrated Debt Maagemet System. The Telephoe Cetre iitially pursues most taxes, except Corporatio Tax ad some high value self-assessed Icome Tax debts. Idirect taxes, icludig VAT, are hadled o aother system ad are ot pursued through the Telephoe Cetre (paragraph 3.9). The Departmet should seek additioal powers for eforcig debts, similar to those of other tax authorities. The Departmet plaed to cosult o the suitability of its powers, although it felt that distrait ad magistrates/couty court actio could be very effective with differet taxpayer groups. It plaed to improve risk profilig over the followig two to three years to eable it to idetify the most appropriate course of actio for differet debtor groups ad allow earlier itervetio i some cases. The Departmet cosulted o extedig its powers i Jue 2007 (Paymets, Repaymets ad Debt: the Developig Programme of Work). The proposals icluded lookig at direct attachmet of a debtor s assets or property without a court order. (paragraph 3.20). It started a risk profilig study i 2007 which is i its early stages (paragraph 2.12 2.13). 28 Maagemet of Tax Debt

appedix oe Part Four Prevetig debt arisig Recommedatio The Departmet should provide up to date ad accurate iformatio ad advice to those i debt o its website ad i leaflets i differet laguages. The Departmet should provide the facility to pay by credit card, passig o ay service charge to taxpayers who use this method. It should be able to require paymet by direct debit where a taxpayer has previously defaulted o a bill. The Departmet should impose a surcharge o persistet late payers ad oblige them to pay the tax ad cotributios they deduct from their employees ito a desigated bak accout. Treasury Miute respose, Jauary 2005 The Departmet agreed with the recommedatio ad had withdraw a umber of out of date leaflets. It plaed to cosult with the volutary sector ad review the iformatio o its website. The Departmet oted the Committee s recommedatio. It stated that it offered a extesive rage of paymet methods which were cotiuously reviewed. It had recetly exteded paymet by debit card ad was cosiderig credit card paymets. Sice May 2004 it had bee a legal requiremet for all large employers (over 250 employees) to make electroic paymets. The Departmet plaed to cosult o the suitability of its existig powers i Jauary 2005, which would iclude the requiremet to provide iformatio, iterest ad surcharge regimes, pealties ad rights of appeal. Curret positio The Departmet has updated iformatio i leaflets ad o its website. It is reviewig laguage requiremets for leaflets (paragraph 4.4). Followig cosultatio, i 2008 the Govermet itroduced legislatio to accept paymet by credit card ad to pass o the merchats hadlig charge to the taxpayer at the time of paymet. Paymet by credit card over the telephoe will be possible by the ed of 2008 ad olie i early 2009 (paragraph 4.8). VAT taxpayers ca set up direct debits olie. From July 2008, taxpayers have bee able to set up direct debits by telephoe for other taxes. The Departmet expects to offer olie direct debit services o all taxes from late 2008 (paragraph 4.7). The Departmet issued a cosultatio paper Paymets, Repaymets ad Debt: the Developig Programme of Work i Jue 2007. It is followig this up with a umber of focussed cosultatios, icludig oe o pealties for late paymet ad rules o chargig iterest i late 2008, with a view to itroducig ew legislatio i 2009 (paragraph 4.12 ad 4.14). Maagemet of Tax Debt 29

Appedix XXX two Scope ad Methodology Scope of the study 1 The study focused o the Departmet s maagemet of tax debt. We examied whether the Departmet maages ad prioritises debt effectively, whether it collects ad eforces debt effectively ad efficietly ad whether it is effective i prevetig debt arisig. We examied the progress made by the Departmet i implemetig previous Natioal Audit Office ad Public Accouts Committee recommedatios (see Appedix 1) ad whether performace has improved sice earlier reports o debt maagemet. 26 Methodology 2 Our fieldwork took place betwee Jauary ad May 2008 ad comprised the followig methodologies: Aalysis of the Departmet s performace data. Iterviews, visits ad process familiarisatio. Customer iterviews. Performace ad process bechmarkig. Comparative aalysis of overseas tax authorities. Documet review. Advisory pael. Aalysis of the Departmet s performace data 3 We coducted a comprehesive aalysis of the Departmet s iformatio o debt recovery ad maagemet. Our aalysis covered debt across all taxes ad i particular self-assessed Icome Tax, Corporatio Tax, PAYE ad VAT. We did ot cover stoodover tax, which comprises direct tax assessmets which are ot payable whilst uder appeal. The Departmet caot legally collect stoodover tax ad so does ot classify it as debt. Suspeded debt, which arises whe assessmets of idirect taxes are ot yet cofirmed has bee excluded where possible. As we examie maagemet of tax credits i the C&AG s Report o HMRC s Accouts 27 each year we have ot covered the maagemet of tax credit debt i this report ad excluded tax credit debt from the data where possible. We aalysed: Mothly activity, operatioal ad maagemet reports, icludig the Departmet s Debt Aalysis Matrix, their primary mothly reportig tool. Fiacial iformatio from the audit of the Trust Statemet. Stadard reports take from the Departmet s debt systems, for example o write offs. Key performace idicator source data where available. Reports from the Telephoe Cetre, Tracig Uit ad the Eforcemet ad Isolvecy Uit ad examples of performace measuremet by Debt Pursuit Offices. 4 We tried to obtai data datig back to 2002-03, to compare the positio agaist our previous report. It was ot always possible because of differet accoutig systems ad because the Departmet has a umber of IT ad reportig systems which compile data differetly. We uplifted all debt tred figures to 2007-08 prices usig GDP deflators. 28 26 The Recovery of Debt by the Ilad Reveue, HC 363, 2003-04; Committee of Public Accouts report The Recovery of Debt by the Ilad Reveue, 49th Report, 2003 04; Comptroller ad Auditor Geeral s Stadard Report o the Accouts of HM Customs ad Excise, HC 447, 2004-05. 27 Report by the Comptroller ad Auditor Geeral o HM Reveue & Customs 2007-08 Accouts, HC 674, 2007-08. 28 GDP deflators HM Treasury. 30 Maagemet of Tax Debt

appedix two 5 We coducted fiacial ad statistical aalysis o: Treds i the value of debt as a percetage of reveue, value of debt by tax, age profile of debt ad amout ad reaso for debt writte off. Treds i volumes of curret ad ew debts by tax ad value. Treds i paymet o time by tax. Treds i debt collected for every 1 spet by collectio activity ad performace treds i the differet collectio activities. Treds i staff ad ruig costs. Iterviews, visits ad process familiarisatio 6 We coducted aroud 25 semi-structured iterviews with staff members ivolved i debt maagemet ad collectio, icludig those i process ad strategy, fiace ad operatios, the Fieldforce programme, trasformatio programme, iteral audit, tax stream process owers ad the Departmet s idividual ad busiess customer uits. We iterviewed seior, policy, operatioal ad frot lie staff members. 7 We also iterviewed exteral stakeholders who represet the Departmet s customers, such as TaxAid, Cofederatio of British Idustry, Natioal Debt Lie, Low Icome Tax Reform Group, Istitute of Credit Maagemet ad the Moey Advice Liaiso Group. We also spoke to the OECD s Cetre for Tax Policy ad Admiistratio ad atteded a joit HMRC/OECD Iteratioal Symposium o the use of aalytics i debt maagemet i November 2007. 8 We visited several operatioal sites: oe of the Debt Maagemet Telephoe Cetres, Tracig Uit, Eforcemet ad Isolvecy Uit, five Debt Pursuit Offices ad the Small Debt Uit. Durig our visits, we iterviewed seior ad operatioal staff, observed operatioal activities such as telephoe calls to collect debts ad tracig activity. We held small iformal group iterviews with operatioal staff to obtai a frot lie view of debt maagemet. We accompaied staff o visits to debtors ad to couty court hearigs. 9 We reviewed aroud 30 debtor cases files. Our aim was to familiarise ourselves with the IT systems ad processes used by staff to collect debt ad to gai a uderstadig of how taxpayers ed up i debt ad how debt builds up. We used a pro-forma to review each case to esure cosistecy, which icluded: amout of debt, umber of ope debts/pealties, history, debts o other taxes, ease of fidig taxpayer iformatio o other taxes, umber of cotacts with the debtor ad actio take by the Departmet. 10 The iformatio gathered i iterviews, visits ad process familiarisatio was used to uderstad the cotext of relevat performace data, to critically assess reports ad busiess cases ad to iform ad triagulate fidigs from the customer research by Ipsos MORI (see paragraphs 11 14) ad bechmarkig work by Professor Wilso (paragraphs 15 20). Customer iterviews 11 We commissioed market research cosultats Ipsos MORI to coduct face to face iterviews with 16 former (i the last two years) tax debtors, 11 curret tax debtors ad three tax agets. We wated to explore the reasos idividuals ad small ad medium sized busiesses got ito debt ad how the itervetios made by the Departmet affected the recovery of that debt, as well as some overall views about tax ad the Departmet. The iterviews took place betwee late March ad May 2008 ad lasted betwee 45 miutes ad a hour. Ipsos MORI talked to a wide rage of people: directors ad maagers of small ad medium sized busiesses, former proprietors of ursig homes, people startig costructio busiesses or movig out o their ow as sole traders i the fiace, graphic desig ad fashio idustries. 12 The iterviews covered: awareess of obligatios, deadlies, paymet optios; reasos associated with difficulties i payig ad help offered by the Departmet ad other groups; customers experieces of beig i debt to HMRC; attitudes to debt ad the extet to which tax debt is see differetly to other debts; ad possible steps HMRC could take to help people avoid gettig ito debt. 13 Ipsos MORI recruiters idetified participats by seekig referrals from cotacts such as persoal coectios or from work places or other social orgaisatios because there was o sample available from the Departmet. This method was successful i fidig those who had bee i debt, but geerated few leads for curret debtors. Ipsos MORI icluded a questio o the Ipsos MORI Omibus; a weekly atioally represetative survey of aroud 2,000 adults aged 15 or over. As well as helpig them to recruit more people curretly i debt, the survey also provided represetative statistics of the umber of taxpayers i tax debt i the UK. 14 We used this work to back up fidigs from our literature research, iterviews ad the views of taxpayer represetative groups. Maagemet of Tax Debt 31

appedix two Performace ad process bechmarkig 15 To uderstad how the Departmet compares to private sector ad other reveue collectig govermet departmets, we commissioed Professor Nick Wilso to bechmark the Departmet s debt collectio processes agaist a umber of comparator private sector orgaisatios. Professor Wilso is Chair of Credit Maagemet at Leeds Uiversity Busiess School, Director of the Credit Maagemet Research Cetre ad a Hoorary Fellow of the Istitute of Credit Maagemet. 16 Professor Wilso explored curret reveue collectio practices, treds ad iovatios across ie orgaisatios, icludig major fiacial services compaies, eergy compaies, a water compay ad a debt collectio agecy. He distilled his fidigs ito a best practice model which he compared agaist the Departmet s curret debt collectio process, orgaisatio ad ifrastructure to idetify areas for improvemet. 17 Fieldwork took place betwee March ad May 2008 ad comprised semi-structured iterviews with ie orgaisatios, a oe-day i-depth workshop with the Departmet ad a bechmarkig workshop. The workshop was atteded by five orgaisatios icludig the Departmet to share commo challeges, ew practices ad maagemet of chage withi the differet orgaisatios. 18 Professor Wilso looked at: Recordig ad updatig of customer iformatio. Usig customer data (ad other orgaisatios data) to determie the right itervetio for the right debtor, at the right time ad cost. The use of activity-based costig ad process mappig to determie the cost effectiveess of debt paths ad collectio strategies. The use ad effectiveess of differet cotact strategies for differet debts. Approaches to eforcemets ad litigatio. Bechmarkig i-house versus out-sourcig of debt collectio by debtor/debt type. Performace maagemet. 19 Professor Wilso s work helped us to put the Departmet s performace i a comparative cotext. His report was used to cross check fidigs from our ow literature reviews, iteratioal comparisos ad iterviews with iteral ad exteral stakeholders. It also provided us with a valuable isight ito how other orgaisatios measure performace ad provided cotext for our performace data aalysis. 20 We have draw o Professor Wilso s work wherever it was possible to make comparisos with the Departmet. It is, however, difficult to bechmark the Departmet agaist other debt collectors because the ature, aim ad customer-base of the orgaisatios are differet. For example, the type of busiess iflueces the age profile of debt. Fiacial services orgaisatios aim to collect or write off ad sell o debts as quickly as possible to avoid bad debt provisio o their balace sheet ad will ot do busiess with these customers agai. The Departmet does ot eed to write-off debt quickly but it ca ad does write-off debts which it cosiders are o loger collectible, perhaps where a debtor is isolvet. Water compaies, like the Departmet, caot choose their customers ad uless they move to aother area, most remai customers whether they pay their bills or ot. Water compaies ca o loger usually cut off a customer s water supply. It is ot i their iterests to write off debts as they may be able to collect paymets over a loger period of time. Comparative aalysis of overseas tax authorities 21 We visited four tax authorities i other coutries to examie their approach to debt collectio ad performace i maagig debt. Prelimiary research led us to uderstad that other tax authorities approaches had moved o sice our previous report. We chose four tax authorities which were comparable to the Departmet i terms of size, rage of fuctios ad tax base ad which had made sigificat progress sice our last report. We used this work alogside Professor Wilso s aalysis of private sector practice to put the Departmet s performace i cotext ad to assess the scope for improvemet. 32 Maagemet of Tax Debt

appedix two 22 We visited the Caada Reveue Agecy, the Netherlads Tax ad Customs Admiistratio, the Irish Reveue ad the Uited States Iteral Reveue Service. All visits took place i April 2008. I each coutry, we used a mix of stadard iterview questios ad coutryspecific questios based o desk research ad our previous report. We iterviewed a mix of policy ad operatioal staff. Areas covered icluded: Chages sice previous report. Updatig ad usig taxpayer iformatio. Debt collectio process. Use of risk scorig ad cotact strategies. Maagemet iformatio ad performace measuremet. Paymet methods. Pealties ad surcharges. Debt levels ad treds. Efforts to prevet debt arisig. 23 We also did some desk-based research o other comparator tax authorities, such as the Australia Taxatio Office ad the New Zealad Ilad Reveue, icludig reports o the Australia Taxatio Office s Admiistratio of Debt Collectio Micro-Busiesses, Audit Report 42, 2006-07 ad the Ispector-Geeral s report Review ito the Tax Office s Small Busiess Debt Collectio Practices, 12 April 2005. Documet review 24 We reviewed iteral Departmetal documets relatig to debt: Progress agaist PSAs ad other strategic objectives. Strategy documets, icludig aalysis of performace data. Busiess cases, project plas ad evaluatios of the pilots ad iitiatives relatig to debt. Iformatio available to taxpayers from the Departmet, icludig the website, hard copy leaflets ad samples of letters to taxpayers. The Departmet s research o taxpayers. 25 We also reviewed literature from other orgaisatios, such as TaxAid, the Low Icomes Tax Reform Group, the Legal Services Research Cetre o taxpayer attitudes ad reasos for gettig ito debt. We reviewed reports o tax admiistratios ad debt by OECD. All literature was geerated i the last three years ad was aalysed agaist fidigs from all other methodologies. Advisory Pael 26 We ivited experts i credit maagemet ad tax debt ad taxpayer represetative groups, to sit o our Advisory Pael. Members were: Barry Stamp Istitute of Credit Maagemet Sebastia Horder Cofederatio of British Idustry Rosia Pullma TaxAid Joh Kerr Adjudicator s Office Kelly Hayworth Low Icomes Tax Reform Group Deborah Shields Natioal Debtlie Athoy Sharp Moey Advice Liaiso Group Chas Associatio of Chartered Roy-Chowdhury Certified Accoutats Represetatives from the Departmet also atteded. 27 The role of the Advisory Pael was to brig to bear a wider body of expertise ad kowledge to our report. The Pael idetified areas where we could add most value, shared their views o the Departmet ad suggestios for improvemet from their experiece ad flag up ay importat omissios from our study. The Pael met twice, oce whe we were i the early stages of fieldwork ad later whe we preseted our draft fidigs to them. We also cosulted them separately o particular areas of expertise. We are very grateful for their iput. Prited i the UK for the Statioery Office Limited o behalf of the Cotroller of Her Majesty s Statioery Office 5975430 11/08 65536 Maagemet of Tax Debt 33